Tax Saving Mistakes
Tax Saving Mistakes
India is known for its dynamic financial sector that gives numerous tax-saving solutions to every Indian. Even though some of these solutions might sound great, but they are not viable in practice.
When it comes to saving taxes, making financial decisions plays a vital role because taxes are considered an essential part of any democracy.
The federal and state government depends on taxes while citizens rely on their government for several things like job opportunities, good conditions for business growth and more.
In India, millions of new taxpayers are introduced every year, and these people need to get their hands on timelines, slabs, and rules of the Income Tax Department.
Even taxpayers get into trouble when tax regulations are changing every year along with the budget. So let’s look at the top saving mistakes they make while looking to save from tax
Endowment insurance plans are schemes of life insurance bought by several people to gain tax-saving benefits. However, investing hard-earned money on endowment plans will not give decent returns in future.
When a person walks into a bank or meets with a life insurance agent for tax-saving schemes, they always tell to purchase endowment life insurance plans for tax saving.
It is because they get the highest commission, usually at the rate of 35% of the first-year premium and 5% on remaining premiums on endowment life insurance plans, and that’s why they convince people by telling future benefits to sell this plan.
These plans are considered long term because they usually range from 10-20 years. So people have to spend their money till the last date of the premium, and if they redeem in between, they will not receive the initial investment in return.
Several taxpayers make this biggest mistake investing in endowment life insurance plans and fail to look at other effective tax-saving schemes that deliver decent returns.
A person should invest in term plans that qualify for tax deduction under Section 80C compared to endowment insurance plans. However, a person should also consider other tax saving schemes rather than investing real money in endowment insurance plans.
Ignoring essential expenses are the biggest mistake that every people make. They don’t know that expenses they make towards health insurance premiums, house loan payments, children’s tuition fees, and more are known as valid tax deductions.
One of the most common allowances is that of House Rent Allowance (HRA). Typically every company provides house rent allowance to most of the employees, and if a person fails to get their allowance, they can claim a deduction of up to Rs 2,000 per month in their income tax returns.
When it comes to talking about tax-saving investments, several people limit their declarations towards Section 80C alone.
They are not known of other tax deductions on interest on housing, medical expenses, expenses towards social donations and more.
A person must know all expenses that qualify as tax deductions because the money spent should not go to waste by ending up paying more taxes. Thus, he must not focus on Section 80C benefits and ensure to claim the deductions.
A person making tax-saving choices in a rush will end up locking funds into an unsuitable investment that doesn’t align with his goals.
For example, if a person is investing in ULIP for five years to achieve a goal, he will not get fruitful results. Similarly, if he is looking to create wealth over the long term and go with a 5-year tax-saving method like Fixed Deposit or other, the objective will not be achieved.
An individual is eligible for tax deductions up to 150000 under Section 80. However, not every person touches the Section 80C limit because they end up shelling out more income taxes than they need to, and due to this, they are unable to meet the Section 80C limit.
Also, a person needs to be well-versed with rules because tax benefit deals with underlying terms and conditions that a person should know before investing.
For example, the entire premium of life insurance is not tax-deductible because it applies only 10% of the sum assured amount.
However, several investors think that the entire premium is eligible for a tax deduction. This makes them hurry into such products, and they buy to save taxes.
It’s not compulsory to invest the whole 1.5 lakh to save taxes. A person must plan their tax-saving investment and invest accordingly to grasp the full benefits of the available tax deductions under Section 80C.
Also, awareness of the underlying terms and conditions will help plan their finance in a better way.
An investment portfolio plays a vital role in building your investment image. Several people who don’t know about tax deductions tend to rush and take a call in making tax-saving investments in the end.
Also, making tax-saving investments at the last minute will not allow people to gain full benefit because a one-time hefty investment will make the monthly budget go haywire.
When it comes to tax-saving investments, timing plays an important role. A person should start their investments at the starting of the financial year to create a diversified investment portfolio.
Several people break their piggy bank and use their emergency funds for mindless investment focused primarily on tax saving.
A person should not think of an emergency fund, and they shouldn’t be thinking about investing to save tax because they are kept for emergency purposes and not as an investment instrument.
The best thing a person can do is set up a fund and keep it aside only to use for significant emergencies and keep their tax-saving paws away from it.
- What is the biggest mistake that taxpayers make?
- What should a person do to gain benefits under Section 80C?
- Which expenses are considered as valid tax deductions?
Several taxpayers make this biggest mistake investing in endowment life insurance plans and fail to look at other effective tax-saving schemes that deliver decent returns.
A person must plan their tax-saving investment and invest accordingly to grasp the full benefits of the available tax deductions under Section 80C.
Expenses towards health insurance premiums, house loan payments, children’s tuition fees, and more are known as valid tax deductions.